Despite Growth, Russia Not Immune To DownturnIn the United States, the financial crisis has been headline news for a year. But for a while in Russia, people could switch on the news and not hear the word "crisis." But Russia, like many emerging economies, has been hit hard because of tumbling oil prices and its dependency on foreign investment and loans.

Russia can sometimes seem like a weird parallel universe. In the United States, the financial crisis has been headline news for a year. But for a while in Russia, people could switch on the news and not hear the word "crisis."

"It was impossible to use the word 'crisis' in the mass media," says Andrei Illarionov, an economist who was an economic adviser to Vladimir Putin when Putin was president.

"For the first several months, there were very clear instructions to the mass media outlets: Do not use the word 'crisis.' They suggested that, OK, Russia happened to be under the impact of 'international crisis' or, as they liked to say, under impact of 'American financial crisis.' But Russia itself was a safe haven — an island of stability, or something like that."

And, hey, why should Russia be affected? Russia hadn't invested heavily in subprime mortgages. It didn't care if some guy in Florida defaulted on his beach house.

Economic And Income Growth

And the country's economy had been growing quite nicely for a decade. The ruble was getting stronger, so imports were cheaper. Illarionov says it was as if salaries had increased 25 percent every year.

"That is absolutely stellar behavior: If you have your income increasing by 25 percent per year, every year [for] 10 years, that's a really good time to be in the country," he says.

Of course, the crisis did hit Russia. Jeff Costello, who runs JPMorgan Chase in Russia, says the crisis snuck in in a couple of ways. The first related to all that growth. Russia, like many emerging economies, was profoundly dependent on foreign investment and loans. Russian corporations got financing from abroad, which dried up in the credit crisis.

"Russian corporations have actually borrowed more in international markets than any other emerging market sector," Costello says. "The other thing, of course, is that a lot of the Russian banks have been dependent upon foreign financing as well."

Tumbling Oil Prices

And then, the price of oil fell of a cliff. That was great news for U.S. consumers. But for Russia, it's terrible because so much of its economy depends on selling oil.

"And suddenly, all of the outputs that Russia provides to the world — oil, steel, aluminum, name a commodity and Russia does it — there was just no demand for it," Costello says.

What's Ahead

Costello and Illarionov have different perspectives on what lies ahead for Russia.

Illarionov, who now works for the libertarian CATO Institute in Washington, is worried the crisis will lead to more government intervention and give it an excuse not to fix problems that really need fixing.

Illarionov says entrepreneurs in Russia who decide they don't want to deal with the authorities and bureaucracy and just want to focus on business might find tax authorities or the police knocking on their door, looking for handouts.

" 'OK, it looks like you're producing a lot of cash. You should share some of this cash with us,' " they might say, according to Illarionov.

"And if you try to complain, you can find yourself in jail or even in a worse situation," he says.

Costello agrees there is a lot to be done. But he says Russia has come a long way since he started doing business there in 1996.

Back then, Costello says, it was "chaos" or a "sort of anarchy," with the entire government sacked each month. "There was a buzz about it at that time," he recalls. "Compared to those times, the last 8 years have been one long yawn of boredom. And that's good."